Gold Resource has made a name for itself, thanks to its disciplined approach to expansion - the company hasn't tapped the market for equity funding since 2010. It has no long-term debt. What's more, its new US$30 million (capital expenditure) mine, Isabella Pearl in Nevada, has thus far been funded internally from cash flow generated from its highly profitable Arista mine in Mexico, and via equipment financing.
In a way, Isabella Pearl is an almost perfect hedge against a more bearish market. A company with a strong balance sheet on the brink of doubling production will increase margins and once the mine is up and running the drain of having to allocate capital from Arista for Isabella Pearl will fall away, says Reid. From then on, the numbers should speak for themselves.
Granted, the board has accepted the theoretical possibility of having to seek external funding for a part of the cost of Isabella Pearl, but as each day passes, the size of any possible cash call shrinks as the mine races towards completion.
On a macro level, the trading environment might become tougher for miners in general, but you can't fault Reid when he points to the indisputable fact that GRC made money during the last bear market slump and could do so again.
Reid admitted the company is tough on itself when it comes to money management and its fiscally disciplined approach, but it's what makes it stand out from the crowd, he says.
"Maintaining a tight, capital structure is part of our debt-averse philosophy, and one that has helped the firm produce profits for the last seven years - since Arista went into production in 2010 - and since then we have never passed on the monthly dividend. Our primary focus is on cash flow and running a profitable business," says Reid.
More than $111 million has been returned to shareholders - the top pay-out was 20 cents a share during the last bull market, also payable in bullion, although that has reduced to 2c/share, not least because of the capital needed to build out Isabella Pearl.
Reid says: "You can have the best deposit in the world but if you've blasted out your capital structure how can you move the dial?"
A 100% increase in production from an already low-cost base should certainly move GRC's dial.
Production is slated to rise from about 27,000 gold ounces in 2018 to about 56,000oz as Isabella Pearl ramps up, rising to an estimated 67Koz gold in Year 2. To what extent the dial moves will depend on the gold price, "but even if the price stays stagnant, we should still see a re-rating based on a substantial increase of profitable ounces".
"Isabella Pearl is a pretty big catalyst for the share price on any reckoning," says Reid.
Proven and probable reserves for Isabella Pearl include 2,694,500 tonnes grading 2.22 grams per tonne (g/t), equating to 192,600oz. Arista's average grade in the first half of 2018 was at 1.7g/t gold.
When combined with GRC's Oaxaca mining unit in Mexico as at December 31, 2017 company-wide proven and probable reserve tonnes totalled more than 5 million tonnes, an increase of 108% since the last count, while gold ounces in the proven and probable category totalled 335,000oz, an increase of 135%.
To understand GRC is to appreciate the success of Arista, part of the El Aguila project, "the jewel in the company's crown". True, the company has recently put a second Mexican mine into production, the Mirador Mine at its Alta Gracia Project, but it's growing slowly as the idea - once again - is to bankroll expansion via internal cash flow rather than "get leveraged up in order to go for growth for growth's sake". Besides, Isabella is the prime focus.
Reid says: "The Arista vein system infill and step-out drilling continues to expand the mineralized horizon at the deposit. Our plan is to drill vein extensions along strike, at depth and parallel to the deposit. Arista is what originally changed the face of the company. And it's what enabled us to pay over one hundred million dollars in dividends to shareholders. Isabella Pearl should be next catalyst to change the face of Gold Resource, a second time following on from Arista."
A second vein system at the Arista mine, called Switchback, was said to have enormous potential. The first Switchback vein system stope came online in February 2018. "Development continues, including the preparation of additional stopes, the installation of ventilation, construction of exploration drill pads, and the addition of water pumping stations."
During 2017, Arista accounted for about 90% of production tonnage, with 55% coming from the Arista vein system and 35% from development ore from Switchback. The Aguila open pit, adjacent to the underground Arista mine, supplied 8% of production tonnage, with the remaining 2% provided by Mirador. Processing mills are nearby.
Reid says at Arista, mineralization occurrs as structurally-controlled epithermal deposits in veins and stockwork zones consisting of concentrations of sulfides containing gold, silver, copper, lead and zinc, associated with gangue minerals such as quartz, calcite, and other minor elements.
"The proven and probable reserve (P&P) mine life at our Arista Mine is currently at four and one half years. This is in large part a function of how difficult it is to drill out in front of an operating underground mine with to the required drill hole spacing needed to fulfil P&P. For mine life perspective, we were in production for three and one half years prior to announcing our first formal P&P report. Since the first report, we have replaced the tonnage mined each year back into subsequent P&P reports and have now been operating since 2010. It is not uncommon for epithermal deposits like Arista to operate for decades while having relatively short official reserve mine lives."
The group's cost profile is competitive. In the first half of this year, it reported an all-in sustaining cost of precious metal gold equivalent per ounce sold at $475 against a cited industry average of $878. In the same period, the total cash cost was recorded at a negative $103/oz against an industry average of $672/oz, a function of using base metal by-product credits from copper, lead and zinc
Then there is the potential for medium term growth and expansion. The company continues to drill the extensions of the Arista deposit to extend the mine life. Still in Mexico, it has an additional four exploration properties that are all within trucking distance of El Aguila's processing facilities. "GRC's objective is to ultimately have multiple properties feeding ore to the strategically located mill, which aims to potentially reduce the capital required to put any future deposit discoveries into production," says Reid.
The company's Mexico properties now encompass more than 68,000 contiguous hectares (684 square kilometers), including 55km of the regional "San Jose structural fault corridor". The company believes the mineralization along the San Jose structural fault corridor is related to the Cocos tectonic plate subducting the North American plate. As the Cocos plate is subducted, it breaks and is partly re-melted into the surrounding mantle. Any faults overlying the North American plate are exploited by the molten magma, which under immense pressure is forced to the surface. It is these volcanic events that have deposited high-grade mineralization along this fault corridor.
The Nevada mining unit now controls over 10,100 hectares (25,000 acres) of development and exploration lands in Nevada's south-central Walker Lane Mineral Belt. Apart from Isabella, there are three other properties in various stages of exploration. All four Nevada properties have potential for high-grade open pit heap leach operations, according to Reid.
With prices falling, what about M&A?
Reid says: "We previously closed four acquisitions in about 14 months that now make up most of our Nevada Mining unit. Right this second M&A would be tough for us to consider. If something fell into our lap right now, we'd look at it. But our primary focus is to get Isabella Pearl mine up and running and the cash flowing. Once that happens our margins go up, even if metals pull back.
"Disciplined, low-risk expansion and a pragmatic approach lie at the heart of the company's philosophy. The move into Nevada was prompted by Mexico's decision to bump up royalties by 8% four years ago and the board said "hold on that was out of the blue, so let's diversify rather than have all our eggs in the Mexico basket", says Reid.
He reiterates that the firm's focus is on measured, organic expansion whilst maintaining a "tight capital structure" to ensure that "no-one can point the finger and say we had to sell equity to keep the lights on - diluting shareholder value along the way".
"Seven years of profitability in the mining industry, returning $111 million back to shareholders during that time while growing the company are achievements we are proud of."
GRC floated in 2006 at $1/share. The current stock price of around $5/share gives the company a market value of more than $300 million. Its headquarters is in Colorado Springs.